2) A small company purchased now for $123,000 will lose $600 each year for the f

Question

2) A small company purchased now for $123,000 will lose $600 each year for the first four years. An additional $800 in the company in the fourth vear will result in a profit of $9,500 each year from the fifth through the fifteenth year. At the end of 15 years, the company can be sold for $135,000. a)Draw the cash flow diagram b) Calculate the FW if MARR is 6%. c) Calculate the ERR when = 8%. 1 35 2.3, Doo A-600 ur 6% )=-123,000.(60°) ( 3.46) 000 (49H3 ) ( -7 oo(6) 3 ) t l35000 (4.9 It3 ) (. 21) Goo (o.azl 1500 (o13) 121711 3

Explanation / Answer

b) The solution given above in the question is incorrect as the profit for fifth year to fifteen years is $9,500 not $135,000.

FW (6%,15 years) = - $123,000 - $600*PVAF(6%,4 yrs) - $800*PVF(6%,4 yrs)

+ $9,500*PVAF(6%,11yrs)*PVF(6%,4yr) + $135,000*PVF(6%,15yrs)

= - $123,000 - $600*3.4651 - $800*0.7921 + $9,500*7.8869*0.7921 + $135,000*0.4173

= - $123,000 - $2,079.06 - $633.68 + $59,348.53 + $56,335.50 = (-)$10,028.71   

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